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If you enjoy reading this site, you might also want to check out these Think Services sites:
 Game Career Guide (for student game developers.)
 Indie Games (for independent game players/developers.)
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 GamerBytes (for the latest console digital download news.)
 Worlds In Motion (discussing the business of online worlds.)
 Game Set Watch (the Group's alt.game weblog.) |
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Opinion: On Sony's PS3 Past, Present, Future - The Problems
by Adam Martin
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July 6, 2009
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[In part one of a Gamasutra opinion piece, former NCSoft Europe CTO Adam Martin takes a close look at what made the PlayStation 1 and PlayStation 2 such enormous successes, and what's right and wrong with the PlayStation 3 business today.]
The PlayStation 1 redefined gaming, opening up entirely new markets of game-players and breaking all records for console sales. Its successor, the PlayStation 2, is still the biggest-selling game console of all time -- and continues to sell, despite being technically inferior to its competitors for almost four years.
Altogether, the PlayStation family has earned Sony billions of dollars in profit. The latest incarnation -- the PlayStation 3 -- has now been on sale for a couple of years.
But Sony Corporation recently announced its first annual net loss in 14 years -- just over $1 billion -- and predicted that 2009 would net an even larger loss, close to $1.5 billion.
What happened? And what's next for the former king of the console market?
This article is entirely my personal opinion, based off public fact and / or rumor. Any “facts” mentioned are taken from public sources (press releases, Wikipedia, etc) -- lots of people have access to more accurate figures, but they're under NDA, so I can't use them.
Finally, note that this is an opinion piece, not a commercial report: take it with a pinch of salt, come to your own conclusions, and don't blame me if it's woefully wrong.
Facts, Expectations, and History
PS1 created some new markets for games players -- perhaps most notably the cash-rich 20-35 year-old young professionals -- and destroyed all records for console install bases, redefining the core sales targets for all future consoles. Today, its is over 100 million. Before PS1, Sony had zero presence in the games industry; afterwards, it was the market leader by a huge margin.
PS2 built upon the PS1's new markets, and outsold it even in the face of direct competition from a giant company (Microsoft) in the form of the good, innovative, Xbox. Total installed base today is over 140 million. It's also still selling quite well at retail; even a year after PS3 launched, in some territories PS2 was often the best-selling console month to month (beating ALL other consoles).
Fundamentals of the Console Business: Costs
Next-generation consoles (for each successive new generation) typically sell at a 10 percent-50 percent loss. Within 12-24 months, they typically sell for a 10 percent-50 percent profit, and by year 5 they typically sell for a 5 percent-30 percent profit even with price drops that bring the price down to typically 25 percent of what it was at launch.
The gradual increase in profit - despite a drop in retail price - is mostly accounted for by gradual improvements in manufacturing. Some of these are automatic - the microelectronics industry each year makes the same components more cheaply, smaller, and less electricity-hungry.
Some of them are down to product revision - less hungry components require less powerful other components, enabling some of the more expensive components to be "downgraded" to cheaper siblings, or improving the circuit layouts, or programmatic design of the system. Finally, some improvements come simply from factory/assembly-line improvements - upgrading the fabrication machines, inventing better assembly processes, etc.
It would be possible to wait until the above improvements made your console profitable before launching - but most console companies can "afford" to make a net loss for the first six to 12 months, and that gives them a six to 12 month lead on their competitors, so they deliberately launch loss-making hardware.
Fundamentals of the Console Business: Launch
It's long been believed that new consoles succeed or fail on the strength of the game portfolio available at launch: without games, a games console is a worthless hunk of plastic and metal. Microsoft's and Sony's attempts to make people think of a console as "something other than a games machine" have not (yet) changed this.
At and shortly after launch, the PS1 had what was - at the time - a huge portfolio of games: Sony had taken the above to heart and made sure there were lots of people developing for their new console. They had a lot to prove, they were new to the market, and (as noted) this was considered essential at the time.
At launch, the PS2 was backwards compatible with the PS1: a PS2 buyer was guaranteed thousands of games they could purchase immediately. This was supplemented again by a large number of launch / post-launch titles that Sony made sure were present.
Generally speaking, even with exceptionally strong IP (for instance, Nintendo's world-best brands of Mario, Zelda, etc), it's been necessary to have either a large portfolio, or huge hardware sales, to survive in the console market.
Fundamentals of the Console Business: Two-Horse Racing
Generally speaking, a games console is so expensive that the vast majority of consumers will only purchase one or two of them at a time. Where they purchase more than one, it is typically because there is a large differentiator between the portfolios of games available.
As a gross simplification, one net effect of this is that it's generally not possible to make a substantial profit in the console industry unless your console is one of the top-two best-selling consoles.
Summary of the PS3: FAIL
- Just looking at traditional consoles, PS3 is languishing in third place ... out of three ... with a mere 15 percent or so of market-share
- If you include the handheld consoles that can play PS1 and PS2 quality games or better, PS3 has around 7 percent overall market-share
- The PS3 still sells at a 10 percent loss per unit, according to Sony (March 2009 - 2.5 years after launch)
- The PS3 is not backwards compatible and has only a medium portfolio of games
- The PS3's main non-cosmetic new feature - PSN - has a very small portfolio of games
Business Analysis: What's Right and Wrong With the PS3 Today, and What Matters to Sony?
Simplifying massively … for Sony as a corporation, the core issues with PS3 that really matter are something like:
- Profit
- Scale
- Sustainability
The relevance and meaning of "Profit" is obvious. Equally, "Scale" is fairly obvious when you look at how dependent Sony corporation is on the revenues from the PlayStation family: it is simply not good enough for PS3 to be "merely" profitable (i.e. the profit margin is greater than 0 percent), it also has to achieve generous absolute profits (i.e. the total cash that PS3 brings in needs to be greater than some number of hundreds of millions of dollars - otherwise it's not worth the effort; it'll barely be “a rounding error” on the quarterly accounts).
And, even if both those can be achieved, Sony needs them to be maintained long-term. They've gone on record to state that the PS3 is expected to be a profit center for a decade or more. Even at the highest levels of realistically-achievable profitability, they've spent so much money on PS3 to date that they're going to have to keep raking in the cash from it for a long time to pay it all back.
And, above all, they have Microsoft -- one of the world's largest, richest, software companies -- constantly snapping at them: at any moment, MS could turn around and change the stakes or rules of the competition fundamentally (they have the resources to do so, in theory).
At the other end of the scale, the giant they dethroned (Nintendo) is now extremely cash-rich, and cash-rich companies can afford to take many risks and make many strange and fantastical gambles. Sony needs uniqueness and product strength to provide a buffer-zone against the unpredictable moves their competitors might make.
Revenue as Profit-Driver
Sony's PS3 revenue (probably - I don't work for Sony, but the following are all standard for consoles and/or are widely believed to be sources of revenue for Sony) comes from:
- Selling the hardware to retailers (PS3 units, plus Sony-branded peripherals such as additional controllers)
- Selling their own in-house developed software to retailers
- Selling third-party developed software (where Sony owns the IP) to retailers
- Licensing third-party software (where they don't own the IP), and pushing it to retailers
- A small fixed-price tax on every unit of third-party software that is sold to retailers by other companies
- A small percentage tax on every unit of third-party software that is sold direct to consumer via PSN
Therefore, Sony can increase revenue by increasing any of the following, in decreasing order of difficulty:
- Unit sales of new PS3s via retail each month
- Unit sales of new Sony-owned software
- Unit sales of new, non-Sony-owned software
- Unit sales of non-Sony-owned PSN software
Traditionally, as a consumer electronics company, Sony has been exceptionally well-adapted for "selling hardware to retail". It's safe to assume that they're probably doing about as well at shifting hardware units each month as any company could do in their position (although we'll revisit that a bit later).
Selling more of your own software - having to do all the marketing, etc. - is easier to improve on for a non-software company simply because there are a lot of other companies who could show you how to do it better.
But ... selling more of other-people's software - software that is already being marketed by someone else, and is costing you nothing - has many more opportunities for being increased.
But it's not just easier. Like-for-like, it may be more profitable too: third-party sales tend to account for the majority of all software sales on PlayStation platforms. The per-unit revenue to Sony is much smaller from third-party titles, but since there's so many more of them, a 1 percent increase in third-party sales could even have a greater effect on the company's bottom-line than a 1 percent increase in first-party sales.
Revenue: Third-Party sales
There are two aspects to the third-party sales. First of all, there's sheer straightforward overall volume of 3rdParty sales (V(3p)):
V(3p) = NumStudios(3rdparty) x AvgTitlesPerStudio(3rdparty) x AvgUnitsPerTitle(3rdparty)
Independently increasing *any* of those factors increases the overall volume - and directly increases Sony's revenue.
Of course, it's not possible to "independently" alter those factors. For instance, allowing anyone and everyone to become a PS3 dev studio would almost certainly decrease the AvgUnitsPerTitle(). Or, conversely, persuading one single awesome studio to switch from - say - 360-exclusive to 360 + PS3 would increase both NumStudios() and also AvgUnitsPerTitle().
Secondly, there's specific projects - the megahit titles, the blockbusters.
GTA IV sold 13 million copies in its first year, approximately one third of them on PS3. Assuming an AvgUnitsPerTitle of 0.5 million, and assuming that GTA IV took about twice as long to develop as a typical PS3 title, a single title from Rockstar was "worth" the output of perhaps as many as 4 other studios.
Revenue: PSN
Finally, there's PSN. PSN sales are dismally low, given the (apparently/allegedly) very high penetration of PS3 owners who've actually hooked their PS3's up to their broadband internet. These should be the easiest of all to increase.
Also... note that this is a different sales-channel to all the other sources of revenue - it does NOT use retail, instead it is a wholly-Sony-owned channel. This means that, for instance, Sony can charge not just for "new" sales but for, well, "any" sales in that channel.
Rather than re-use the formula for revenues from retail third-party sales, I'm going to suggest a slightly different formula for the revenues from PSN, which I think will help with later analysis:
R(PSN) = NumTitles(PSN) x AvgSalesPerTitle(PSN) x ( AvgPricePerTitle(PSN) + ( AvgMicroPaymentsPurchased(PSN) x AvgMicroPaymentPrice(PSN) ) )
Profit
That provides some perspective on the revenue situation right now, which matters for the "Scale" point above - but says very little about the "Profit" point, since it ignores costs. Here's a quick look at ways that Sony could increase PS3 Profit:
- Increase revenue-per-unit-PS3 sold via retail
- Reduce hardware production costs (increases profit per unit PS3 sold)
- Increase the revenue-per-title sold via retail
- Increase the tax-per-unit-sold via retail
- Increase the number of studios making PS3 titles
- Increase the volume of PS3 titles made by each studio
- Increase PS3 installed base [1]
- Increase the number of PS3-exclusive games [2]
- Decrease the number of "[competitor]-exclusive" games (ditto)
- Increase the volume of PSN titles
- Increase the revenue-per-title of PSN titles
[1] - (potentially REDUCES profit if PS3 units are selling at a loss, but ... it probably INCREASES the AvgUnitsPerTitle (since there's more consumers), which increases the revenue from the software tax. In a double-whammy, it also increases the desirability for studios and publishers to ship on PS3, in turn increasing the number of titles they choose to ship on PS3.)
[2] - (potentially prevents consumers who own multiple consoles from choosing to purchase a game for "the other console"; potentially also forces some consumers to purchase a PS3 in order to play the game)
...but I don't believe all of those are necessarily wise routes to take - and some of them are more subtle than they may first appear.
In the second and final part of this editorial, to be published later in the week, we'll look at solutions -- what Sony can potentially do to change its position in the market, given where it is today.
[Adam Martin is an MMO Consultant, specializing in business, operations, and technology. As the European CTO for NCsoft he oversaw internal development in Europe, helped set up the EU dev studio, and sat on the steering group for Social Networking in games and marketing. He is currently setting up a new kind of iPhone publisher, with a simple mantra: don't screw the developers.]
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Increase quality and originality of PS3 games.
I guess I'd like you to elaborate a bit more on what you think is lacking in terms of quality when referring to PS3 software because as an owner of all three consoles I can personally attest that a lack of quality or originality isn't the predominate issue with PS3 current lack of success. Two of Sony's high profile exclusives, Killzone 2 and InFamous respectively, are top notch, AAA games that cannot be played anywhere else and there are several other top tier exclusives in the pipeline. Also, as to originality, the PSN store is rife with unique, quality games and the PS3 is also getting a much steadier flow of multiplatform games so again, could you elaborate on what you think is lacking?
Also, if quality and originality are the most important issues in terms of console sales, why is the Wii number one?
Maybe you guys should apply for a job at Sony?
I would be interested to see how much Blu-Ray factors in for Sony's bottom line. It seems like they increased their risk significantly(dollars invested in ps3 launch) by making the PS3 the Trojan Horse for Blu-Ray. But I have heard that BD sales are middling and HD-DVD still enjoys a larger installed base(this claim warrants some skepticism). The state of the economy probably made a $29 movie you have already seen a less attractive purchase. I guess this could be expanded into a larger question: how much non-game revenue does the PS3 generate, including BD sales and movie rentals.
As if that old dead horse needed to be resurrected for another good thrashing...
Agency, DC Universe, Quantum, Agent, Modnation Racers, R&C Future: Crack in Time, Grand Turismo 5, The Last Guardian, MAG, Heavy Rain, Uncharted 2, God of War 3
If any one of these becomes the must-have-game of the holiday, Sony will sell.
(BTW, I got my game list from http://www.gamesonsmash.com/?p=7866)
You hit Horse. Horse takes 100 damage.
You hit Horse. Horse takes 100 damage. Horse dies.
You hit Horse. Horse takes 100 damage...
That being said...
@Steve: I would say that articles like this are EXACTLY what Gamasutra needs. A portion of Gamasutra readership already understands factors and analyses like this, but many do not (check out comments on similar articles for examples). Articles like this help to develop axioms in people, and form a common basis of understanding and vocabulary. Once we're all speaking the same language, and (regardless of agree-or-disagree) at least share concepts, the discussions can then be elevated.
Also keep in mind that Gamasutra's readership runs the gamut from CEOs and Executive Producers through software engineers and level designers to fans who want to understand how the industry works. Someone can be the best DirectX engine designer on the planet and not understand a whit about business and market development; one skillset does not buy anything in a different skillset. Technical prowess, creative excellence and business sense are unrelated and must be developed separately. If the goal is to increase the number of business-savvy artistic programmers, this article and others like it are golden.
I am still curious what the financial upside for sony is in winning the format war. It is clear the PS3 was an integral part of their strategy. One of the reasons, early on, that the PS3 was so expensive to manufacture was the BD drive.
Aside from that, I think it's a pretty good rundown for everyone, albeit told from an unofficial sort of viewpoint. Basically, Sony has adopted the same problematic attitude that caused Nintendo to lose their position (not that I ever liked Nintendo, per se, since I was always a Sega & NEC/HudsonSoft player) and Atari before them. Namely, Sony's arrogance grew too large, especially considering the myriad elements that change within any market, context, etc. What amazes me most is that any remotely competent business keeps repeating the same mistakes that cost predecessors before them. In this case, Sony is repeating the same types of mistakes that cost Nintendo and (earlier) Atari. It's analogous to the arrogance of the American automotive Big Three (two of which have finally declared bankruptcy this year). I'd like to see a company become successful and still manage to maintain a humble perspective on the entire, larger, total marketplace. I'm probably dreaming, though.
I hear that Agent is to "start" as an exclusive similar to GTA. (http://www.qj.net/Take-Two-explains-why-Rockstar-s-Agent-is-PS3-exclusive/pg/49/
aid/132010). Also, DC Online is not really an exclusive. It is also on PC. I know that is it exclusive to PS3 with consoles but that hits the "must have mentality." However, MAG, Uncharted 1 & 2, and God of War(s) are totally going to drive the must have mentality.
I am of the opinion that despite the market forces working against the PS3, I am not so sure they could have gone with a different decision other than what they did with the PS3. If they had made a less expensive and capable console that would have likely meant instant death in their battle against MS. This article is about hindsight not foresight in my opinion.
It is also unfortunate for Sony that MS beat them to the next generation market. I really believe that has a lot to do with MS superior position. This meant that Sony had no software worth a darn for two years. While MS was beginning to pump out new titles while the PS3 developers struggled with the new platform. Those titles Norm mentioned, if out already during this period the article covers we would have a different story.
And no, I think blu ray was the way to go. The PS3 is the best piece of equipment. The games just haven't been there. I hope that it just isn't correct that the PS3 can't recover (sorry double negative).
The PS3 is my favorite console, after the PC of course. :)
Sony profits from SDKs, Blue-Ray technology (to manufacture or use blue-ray, somehow part of your moneyh ends with sony, even if you are making a movie or a XBOX 360 game), HD cameras, HD editing software (Sony sells some nice software that you can use to edit movies... or cut-scenes...), some other misc software that all companies end using somehow when making games (like Sony soundforge), media (specially on cameras from sony, that write only in Sony tapes or Sony memory cards) and so go the list...
Sony does not made PS line supporting movies with their sponsored media since PS1 by accident or convenience, you can see a clear strategy there, PlayStation is not just a console, as the name says, PlayStation is a complete entertainment system, that use lots of Sony stuff directly on indirectly (like to make a blue-ray movie you need blue-ray tech, HD cameras from sony, editing software from sony, media from sony...)
Of course, if the end user side gets more popular, it means more companies making content, and thus using the non-end user side of the things, but I see all the time people forgetting that amateur cameras and consoles are not Sony only source of profit (and I guess that is not even the main one)
1: When you say something like "before PS1 Sony had zero presence in the gaming industry"(maybe not your exact words but close enough), you have to be *very* careful how you word it. I wasn't around playing games back in, say, '92 or so (didn't really start playing games 'til '95, and that was with a good old Genny ;), but I know enough to know that Sony *did* have a presence-albiet weak-before PSX. They designed the sound chip for the SNES/Super Famicon, were in the process of collaboration w/ Nintendo for an SNES add-on (and I'm sure when Sony made the rounds to publishers/developers for PSX some of them still remember how f'ed up Nintendo did them when they switched for Phillips), and had a division named Sony Imagesoft that made (mostly terrible, from what I hear) FMV games for systems like the Sega CD. So yeah, it was a weak presence, but it *was* there, and needs to be accounted for; they had some experience in the industry before then, and even shopped the PSX to Sega as well but we all know how Sega was like back then xD
2: No mention of the Gamecube?!? Sure the Xbox was a formidable competitor, but it did absolutely *nothing* to PS2 in Japan; that's where the Gamecube came in. And truthfully, the GC did little against it there itself, but it did marginally better against PS2 in Japan than Xbox ever did. Also, the GC had it's fair share of gems; I even wished I still had mine and will likely get one in the future since I, like many gamers then, sorta unfairly jumped against the Big N when they were still appealing to mainly "core" gamers but we never appreciated it.
3: You're pretty spot-on w/ the manufacturing points; that's how it seems to work. There's always pressure from your competitors to release your product as soon as possible, even if you'd rather wait 'till finances are a bit more on your side. But to be honest (as far as I know), it's Sony that started the process of releasing consoles at a loss; they brought a different facet of business strategy into the console space when both Nintendo and Sega typically sold their stuff at a break-even pricepoint or even at a profit straight from launch (and as such, it's a bit of a practice Nintendo's brought back w/ the Wii). What Sony did was pretty much (like many other areas) change the game on that front; Nintendo was pretty surprised but managed to keep up b/c of their cash reserves and smart busines. Sega, on the other hand, was hemmoraging money and made idiot business mistakes, which eventually costed them a spot in the Console Manufacture Ring (trademark, hehe). One of the reasons I do find this sort of practice interesting is b/c both Sony and Microsoft were and still are predominantly electronics and software manufacturers, respectively. In those industries it's usually that you sell your stuff for profit from the start (probably not so the case w/ software; dunno, I'm just assuming on this end), and Nintendo and Sega did the same thing for so long b/c the industry as a whole was smaller back then; there weren't 100s of millions of people playing back then so they had to try and make profit as much as possible. Sony, b/c they had other businesses they could profit from, figured they could sell the PSX at a loss to drive adaption rates much faster, and it worked.
4: Good again on speaking the grounds of what it takes to have a successful stay in the console space. I think one of the reasons 'the launch lineup' has been less important these days is b/c of how the industry itself is nowadays. Back in the 8 and 16-bit era, games came out *generally* slower b/c of the cartridge process, so if a console had crappy launch games people were gonna hafta put up w/ them a lot longer than they'd like. W/ the success of the PSX and PS2, Sony managed to show that consoles could both have a (damn) large library of games (so there'd be more to choose from), and that since game releases started coming out faster players'd be able to pick up newer stuff quicker if they got bored w/ one thing. There's a lot more reasons why "the launch box" isn't deemed as critical to a console's overall success these days, but that's a lot to go into xD
5: As far as the "two horse race" thing, I think the current generation is proving that even *that* isn't as "you're dead" a scenario for the one in last place (Sony in this case) as it was back in the 8, 16, 32, and even previous generation of consoles, and I think that comes down to two factors: One is that the industry's large enough so as to where now even the player in last place can find a sizable audience, and two,..we're dealing w/ financial juggernaughts here. This is Sony, Microsoft and Nintendo, not Sega, NEC, Panasonic, Atari, etc; they can afford the net losses and in Nintendo's case that's very interesting b/c they work pretty much exclusively as games, that is to say, games are their biggest industry. They don't have electronics like Sony or software like Microsoft for supplemental income (and in those two cases it's actually their main income, sorta like what the dude above me said), and yes they couldn't afford quite as large net losses w/o taking drastic action, but I am saying that even in they were in last place I assume they could survive, just like how they survived w/ the Gamecube (though they certainly struggled to do so).
Heh, there's actually quite a lot to the article and I don't have enough time to speak of the rest right now, but rest assured I'll do so later. In any case, it's an interesting piece and I'm glad someone brought it up.
Good article. I did start to glaze over about half way through but I hung in there.
I would agree that the Summary on the PS3 is a FAIL however for a much simpler reason: Sony did not have the titles (and the correct titles) at launch. As of this writing I still don't think they have the right titles in their library of games.
The playstation has always represented JRPGs (Final Fantasy) and crazy adventure games (like Tomba 2). The PS3 launched without those titles. I felt like SONY left it's core audience to try and join the FPS wave of games.
The XBOX is basically a FPS box. Which, of course, is a huge share of the industry. Trying to combat the XBOX on the FPS field (which was never part of the allure of the Playstation) was suicide.
Likewise I don't believe that the XBOX has done that great in the RPG realm. Its just a fact that FPS combined with online CO-OP make it too much fun to blow up your friends.
I am still waiting for a slew of JRPGs and Adventure games for my lonely PS3. If and when this happens, I believe that the Playstation will start making some money for Sony.
I'm not really sure how you can reasonably downplay the effect the PS1 and the PS2 had on this industry. The PS1 in particular completely changed the topography of the market and made gaming more than just a family-friendly hobby. Of course if you have some counterpoints to offer I’d love to read them but generally speaking, I’d venture to assert that the PlayStation brand and subsequent consoles have enjoyed an effect on this industry that matches if not exceeds the profundity of anything that came before it, including the NES and the Atari 2600.